Scrapping LRBAs would be detrimental to investors

A commercial property lender believes banning limited recourse borrowing arrangements in their entirety would be too heavy handed, saying critics often cite residential property spruikers to cast shadows.

Thinktank chief executive Jonathan Street said limited recourse borrowing arrangements (LRBAs) have become an essential part of the mortgage landscape for small-scale, non-residential property.

"In this sector of the market, LRBAs play a vital role, especially for small to medium-sized businesses (SMEs) where owners are looking to 'marry' their business objectives with their long-term retirement savings goals," he said.

"It's to be hoped that the current review of LRBAs by the Council of Financial Regulators gives this form of debt full and objective consideration."

Thinktank has financed 265 LRBAs since December 2013, with the current loan balance currently standing at $134.9 million at an average loan size of $548,000. The repayment type is split between interest only at 21.5% and principal and interest at 78.5%.

The average loan-to-value ratio (LVR) is 63.9%. Self-employed borrowers represent about 90% of the loan book, while owner-occupiers make up about 60%.

"Most importantly, none of the current loans is in arrears and only one loan has ever defaulted, following a cyclone, and that loan did not incur a loss," Street said.

Street says critics of LRBAs often cite the activities of residential property spruikers "to cast a cloud over this lending instrument more broadly."

"We fully support ASIC's tough line on property spruikers who prey on the vulnerable by encouraging an unsupportable SMSF and corresponding LRBA. But to ban LRBAs entirely, thus denying many SMEs and self-employed owners the opportunity to meet their commercial and superannuation ambitions, would simply be throwing the baby out with the bath water," he said.

At 30 June 2016, LRBAs made up 4% of all SMSF assets at $25.4 billion.

"Certainly, the growth has been strong. But that's not an argument to arbitrarily shut down this borrowing avenue, especially in the non-residential sector where it has an excellent track record both for commercial and superannuation goals. The goals of small business and government here are aligned - self-funded retirement with less or no dependence on welfare," Street said.

Read more: LRBAsThinktankJonathan StreetASIC
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